Significant changes to the way unspent pension funds are taxed after death are on the horizon, and individuals need to start preparing now.
From April 2027, most unspent pension funds will form part of an estate for Inheritance Tax (IHT) purposes. This change could result in substantial tax liabilities for many estates.
What Does This Mean for You?
Under the new rules, unspent pension pots will be added to property, shares, and other assets when calculating an individual’s estate for IHT.
While assets left to a spouse or civil partner will remain tax-free, they will be included in their estate when they pass away, potentially leaving future beneficiaries with a significant tax burden.
For example, an unspent pension fund of £800,000 could face a 40 per cent tax charge (depending on the use of allowances and reliefs), resulting in an IHT bill of £320,000 for beneficiaries.
Why act now?
This change will predominantly affect wealthier individuals, but many more families may now find their estates exceeding the IHT thresholds of £325,000 (or £500,000 with the Residence Nil-Rate Band).
With the nil-rate bands frozen until at least 2030, careful planning is essential to mitigate the impact of these changes and reduce unnecessary tax liabilities.
Strategies to consider
There are several proactive steps you can take to reduce the potential impact of IHT on your pension funds:
However, it’s important to strike a balance. Any strategy should ensure you have enough funds for a comfortable retirement while mitigating future tax liabilities.
Who needs to prepare?
Even if you don’t currently consider yourself wealthy, these changes could affect your estate. Rising property values, investment growth, and pension savings mean that more estates may breach the IHT thresholds in the coming years.
Families who previously expected to avoid IHT may now find themselves liable, adding financial strain during an already difficult time.
The changes to pension taxation are a call to action for everyone to revisit their retirement and estate planning strategies.
While pension may provide a good tax-free means of reducing your tax position while working, this will now need to be balanced against the needs to reduce any unspent pension pot left to the new IHT rules.
Whether you’re looking to safeguard your beneficiaries from unexpected tax burdens or maximise the efficiency of your estate, early planning is key.
Our team of specialists is here to help you navigate these changes. By assessing your unique situation and tailoring strategies to your needs, we can help ensure your plans are robust, tax-efficient, and aligned with your long-term goals.
